Batuk Gathani

China has a fast growing economy but its banking sector under-developed, albeit with huge potential for expansion, modernisation and improvements in efficiency. Many high-profile western banking groups are buying stakes in China's banks, hoping for considerable gains from this development.

THERE is much speculation about the "investment stake" western banks have in China and there is competition on both sides of the Atlantic among investment and commercial banks to enter the booming Asian economy.

The British banks, led by Bank of Scotland, have bought a stake in Central Bank of China, and this deal will pave way for other European and American banks to enter the Chinese banking market.

The Central Bank of China deal has made China's high-growth high-risk banks one of the country's hottest investment sectors.

China has a fast growing economy but its banking sector is both under-developed and inefficient, albeit with huge potential for expansion, modernisation and improvements in efficiency.

The western banks want a legitimate and substantial stake in this development and while vast profits are the main motivating factor, there is much uncertainty about the ultimate outcome.

The western banks are "high-profile" while Japanese banks are keeping a "low and modest profile" watching the events unfold.

Shareholders are not too happy about the outcome of such "strategic investments' in China, and fear that banks could face "adverse" investment prospects.

Bankers have argued that China is a "calculated gamble" but that its fast-moving economic expansion (it may average over 10 per cent by this year-end) and vastly underdeveloped banking system, attract financial groups seeking a foothold in China.

Most Chinese banks are saddled with huge portfolios of bad loans as most advances are granted on political rather than commercial considerations.

Here, again, estimates vary but, according to analysts, a third of the Asian tiger's capital base could be "wiped out" if bad and suspect loans are written off. While this may not trigger the collapse of the Chinese banking system, it could substantially damage "credibility and efficiency".

Bank of China is preparing a novel $4,000-million " strategic overseas listing" which will be floated in 2006, essentially to attract overseas investors for a 10 per cent stake.

Apart from major western banks, rich members of the nearly 22 million Chinese diaspora in North America and East Asia could buy a substantial portion of the investment stake.

The key players in the Asian giant's banking sector are: Bank of America 8 per cent and Temasek 5.1 per cent, with combined holding in China Construction Bank; Hong Kong and Shanghai Banking Corporation with a 28 per cent stake in Bank of Shanghai and Bank of Communications (8 and 20 per cent); and Hang Seng Bank with 16 per cent in China's Industrial Bank.

According to analysts "this is just the beginning" as banks have different investment strategies in China and the struggle for control over its financial system is heating up.

On their part, the Chinese authorities are closely monitoring the investment flows and the ensuing situation.

A state-run agency — Central Haijin Investment Company — has been set up to rescue bad-debt ridden Chinese government banks, which have used the country's vast foreign exchange reserves managed by the State Bank of China.

Many analysts feel that China's poorly managed banks and securities firms may yield management control to overseas investment groups, where key players could be rich members of the Chinese overseas business community.

Last week, Royal Bank of Scotland, Merrill Lynch and Chinese financial tycoon Mr Ka-Shying were the latest investors to put down $3,300 million for a 10 per cent stake in Bank of China.

HSBC (Hong Kong and Shanghai Banking Corporation) and Citibank Group have already bought minor stakes in small Chinese banks with a view to buy ultimate management control.

It is realised that no western bank or financial institution can have an effective presence in the Chinese banking system without buying an investment stake.

With a purchasing power parity (PPP) of $7,262 trillion in 2004, China ranks as the world's third largest economy after the US and the European Union.

China is world's fourth largest commodity trader and accounts for $1,100-billion two-way trade.

It is now the European Union's second largest trading partner after the US, and it is the US' third largest trading partner.

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